Yesterday, Netflix filed a Form 8-K announcing that, on December 5, 2012, Netflix and its CEO, each received a “Wells Notice” from the SEC Staff indicating its intent to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and its CEO for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 (Current Reports on Form 8-K) and 13a-15 (Controls and Procedures) under the Exchange Act. The 8-K itself represents an interesting piece of disclosure, but the CEO’s follow-up Facebook post attached to it is even more interesting to read.
Please see below a few quotes from Reed Hastings’ (Netflix’ CEO) Facebook post attached to the 8-K, which describes Mr. Hastings’ prior posts and his reaction to the SEC’s Wells Notice.
“We use blogging and social media, including Facebook, to communicate effectively with the public and our members. In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this. In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.”
“First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers. Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month. Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.”
Netflix’ debacle highlights the disparity between current news dissemination channels and Regulation FD rules, which date back to 2000 and are designed to address the problem of selective disclosure of material information by companies. In 2000, the SEC took a narrow view as to what constituted a broad, non-exclusionary distribution of material nonpublic information. For example, at such time, the SEC took the position that a company’s website alone would not satisfy broad dissemination for Regulation FD purposes. In 2008, the SEC backed off of this position and provided guidance in an interpretative release on when information posted just on a company website would be considered public enough to serve as an alternative method for distribution of material information about the company under Regulation FD.
Assuming the information is viewed as material, it is unclear whether the SEC would extend its guidance set forth in its 2008 interpretative release to Facebook or other social media posts. If the SEC did apply such guidance to social media, a company would need to evaluate whether (i) the company’s or executive’s presence on these social media websites is viewed as a recognized channel of distribution of information about the company, its business, financial condition and operations and (ii) disclosure of information through social media tools makes it available to the securities marketplace in general.
While it still remains to be seen whether the SEC will recognize social media websites as appropriate Regulation FD disclosure vehicles, companies should consider revisiting the adoption of social media policies to establish parameters for appropriate social media disclosures of company information.